RESULTS REVIEW 4QFY15 29 APR 2015 Marico Kaya INDUSTRY FMCG CMP (as on 28 Apr 2015) Rs 1,635 Target Price Rs 1,823 Nifty 8,240 Sensex 27,226 KEY STOCK DATA Bloomberg MAKA IN No. of Shares (mn) 13 MCap (Rs bn)/(us$ mn) 21/333 6m avg traded value (Rs mn) 255 STOCK PERFORMANCE (%) 52 Week high / low Rs 2,330 / 214 3M 6M 12M Absolute (%) 37.5 180.9 - Relative (%) 45.8 180.4 - SHAREHOLDING PATTERN (%) Promoters 60.55 FIs & Local MFs 4.65 FIIs 5.95 Public & Others 28.85 Source : BSE Harsh Mehta harsh.mehta@hdfcsec.com +91-22-6171-7329 Thesis intact Marico Kaya s (Kaya) 4QFY15 revenue and PAT were inline with our estimates. Despite sluggish macro environment, Kaya India SSG grew by a robust 12% along with 5% YoY growth in customer count. By adding 8 new clinics in 4Q, the company reached its target of 100 clinics in India in FY15. The company also added 7 KSB (taking its total to 14). However, new clinic addition will be margin dilutive as evident in EBITDA margin (India) contraction of 100bps YoY to 6%. The business model is unique and impregnable. Hardly any long term capital is required as operations require negative working capital. Cash of Rs 1.8bn post demerger (from Marico) and improving OCF are adequate to fund growth over the next 3-4 years. By then, operations may well spew enough cash to continuously expand Kaya s footprint in a grossly underpenetrated space. With multi-year growth possible and no incremental funding needed, we value Kaya at 4.5x FY17E EV/sales. Recommend BUY with a TP of Rs 1,823. BUY Kaya India : margins to expand in coming quarters India revenues grew by ~14% YoY to Rs 459mn (customer count grew by ~5%, ticket size grew by ~9%). Despite sluggish macro environment, Kaya India SSG grew by a robust 12%. Aided by pan India introduction of new beauty facials, care category grew by 27% (SSG : 23%). Cure category witnessed 15% YoY growth (SSG : 12%). The company added 8 new clinics and 7 KSBs in 4Q, which resulted in 100bps EBITDA margin contraction to 6%. Management intends to add 10-15 clinics and 20+ skin bars in India each year. Store level EBITDA margin of 33% in India is much higher than reported margin of 6% in 3QFY15. We think Kaya will derive significant operating leverage in coming quarters. Kaya ME : margin levers are limited Middle East (ME) sales grew by 9% YoY (SSG : 5%). EBITDA margin remained flat YoY at 14%. Management plans to add 2 new clinics each year. Margin levers are limited as the business mix leans heavily towards cure already. Owing to upcoming expansion, management expects sustainable margin in the ME to be in the range of 15-16%. FINANCIAL SUMMARY (Rs mn) 4QFY15 4QFY14 % Change 3QFY15 % Change FY14 FY15 FY16E FY17E Net rev. 869 778 11.7 862 0.9 2,911 3,323 3,907 4,702 EBITDA 71 67 6.0 112 (36.7) 104 328 441 567 Core profit 72 62 15.0 121 (40.6) 47 373 408 520 Diluted EPS (Rs) 5.5 4.7 15.0 9.0 (39.7) 3.6 28.9 31.7 40.3 Diluted P/E (x) 450.8 56.5 51.6 40.5 EV/EBITDA (x) 185.7 58.6 43.2 33.1 ROAE (%) 2.5 10.4 10.3 11.7 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Marico Kaya (consol) witnessed 8% YoY same store growth QUARTERLY FINANCIALS Year to March (Rs mn) 4QFY15 4QFY14 % Change 3QFY15 % Change Total revenue 869 778 11.7 862 0.9 Cost of goods sold 88 90 (3.1) Gross profit 782 771 1.4 Staff cost 275 263 4.5 Rent 107 105 1.4 Other expenditure 329 291 13.2 Total exp. (excl. COGS) 711 659 7.8 EBITDA 71 67 6.0 112 (36.7) Dep., amortisation 35 30 17.4 EBIT 36 82 (56.1) Other income 35 39 (8.4) EBIT including other income 71 121 (40.9) Interest expense 0 0 (28.3) PBT 71 121 (40.9) Provision for taxation 0 0 (670.0) APAT 72 62 15.0 121 (40.6) EPS (Rs) 5.5 4.7 15.0 9.0 (39.7) Promotional campaign in 4Q led to higher other expenses QoQ thereby impacting margins as % of sales COGS 10.1 10.5 (42) Staff costs 31.6 30.6 109 Rent 12.3 12.2 7 Other expenditure 37.8 33.7 411 EBITDA 8.1 8.6 (50) 13.0 (484) Net profit 8.3 8.0 (33) 14.0 (577) Tax rate (0.5) 0.0 (53) Page 2
By adding 8 new clinics in 4Q, the company reached its target of 100 clinics in India in FY15. The company also added 7 KSB (taking its total to 14) FY15 witnessed restart in store expansion India ME Kaya Skin Bar 120 No. of clinics 100 80 60 Despite sluggish macro environment, Kaya India SSG grew by a robust 12% 40 20 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14* FY15 Aided by pan India introduction of new beauty facials, care category grew by 27% (SSG : 23%). Cure category witnessed 15% YoY growth (SSG : 12%) Middle East (ME) sales grew by 9% YoY (SSG : 5%). Management expects SSG of 7-8% going ahead Operational Metrics (India) Growth (% YoY) FY12 FY13 FY14 1QFY15 2QFY15 3QFY15 4QFY15 Collection SSG (cash inflow) 13 2 10 10 5 10 10 Net Revenue SSG 4 8 7 9 10 15 12 Customer count -1-3 3 4-2 2 5 Ticket Size (INR) >6,000 >6,500 >7,000 7,551 9,144 6,865 8,319 Category Mix (India) (%) FY13 FY14 1QFY15 2QFY15 3QFY15 4QFY15 Cure 60 67 71 72 66 65 Care 20 13 10 12 13 16 Products 20 20 19 16 21 19 Operational Metrics (Middle East) Growth (% YoY) FY13 FY14 1QFY15 2QFY15 3QFY15 4QFY15 Collection SSG (cash inflow) 5 8 14 15 18 6 Net Revenue SSG 16 8 16 23 21 5 Customer count 4 1 6 5 3 0 Ticket Size (USD) 350 380 406 415 435 427 Page 3
Category Mix (Middle East) (%) FY13 FY14 1QFY15 2QFY15 3QFY15 4QFY15 Cure 78 79 79 78 79 78 Care 12 11 11 12 11 11 Products 10 10 10 10 10 11 KEY ASSUMPTIONS (%) FY14* FY15 FY16E FY17E India Business Revenue growth 7.0 11.5 22.0 25.0 COGS as % of sales 19.7 19.3 19.2 19.0 Staff cost as % of sales 26.1 25.5 24.5 24.3 Ad spends as % of sales 8.3 8.0 7.5 7.0 Rent as % of sales 17.1 16.0 15.5 15.3 Other expenses as % of sales 28.8 27.0 25.5 25.3 EBITDA Margin 0.0 4.3 7.9 9.3 ME Business Revenue growth 19.2 17.0 13.0 15.0 COGS as % of sales 17.5 16.0 15.8 15.8 Staff cost as % of sales 44.8 43.0 42.8 42.7 Ad spends as % of sales 7.1 6.5 6.3 6.0 Rent as % of sales 8.2 7.0 7.5 7.8 Other expenses as % of sales 14.9 10.5 12.5 12.3 EBITDA Margin 7.5 17.0 15.3 15.6 Consol Kaya metrics Revenue growth 12.5 14.1 17.6 20.3 COGS as % of sales 18.6 17.7 17.6 17.6 Staff cost as % of sales 34.9 31.9 33.0 32.5 Ad spends as % of sales 7.7 7.3 6.9 6.6 Rent as % of sales 12.9 12.2 11.8 11.9 Other expenses as % of sales 22.2 21.1 19.4 19.5 EBITDA Margin 3.6 9.9 11.3 12.1 *Based on Kaya India + Kaya ME. The company declared 15m nos for Mar-14 Page 4
INCOME STATEMENT (Rs mn) FY14* FY15 FY16E FY17E Net Sales 2,911 3,323 3,907 4,702 Growth (%) 12.5 14.1 17.6 20.3 Material Expenses 542 587 686 825 Employee Expenses 1,017 1,060 1,289 1,526 A&P Expenses 225 242 270 308 Rent 376 406 460 560 Other Operating Expenses 647 700 760 915 EBIDTA 104 328 441 567 EBIDTA (%) 3.6 9.9 11.3 12.1 EBIDTA Growth (%) (178.8) 217.1 34.4 28.4 Other Income 39 161 119 137 Depreciation 95 116 152 179 EBIT 48 374 408 525 Interest 1 0 - - PBT 47 374 408 525 Tax - 0-5 Minority Interest - - - - Core PAT 47 373 408 520 Core PAT Growth (%) (182.4) 698.1 9.4 27.4 EO items (net of tax) 351 (48) - - RPAT 398 325 408 520 RPAT Growth (%) (182.4) (18.2) 25.6 27.4 EPS 3.6 28.9 31.7 40.3 EPS Growth (%) (174.6) 698.1 9.4 27.4 *Based on Kaya India + Kaya ME. The company declared 15m nos for Mar-14 BALANCE SHEET (Rs mn) FY14* FY15 FY16E FY17E SOURCES OF FUNDS Share Capital 129 129 129 129 Reserves 3,275 3,646 4,055 4,575 Total Shareholders Funds 3,404 3,775 4,184 4,704 Long Term Provisions 35 93 93 93 TOTAL SOURCES OF FUNDS 3,439 3,869 4,277 4,797 APPLICATION OF FUNDS Net Block 183 556 704 826 CWIP 6 6 6 6 Goodwill 1,980 2,021 2,021 2,021 Investments 1,704 1,519 1,519 1,519 LT Loans & Advances 148 250 225 271 Inventories 247 335 331 386 Trade Receivables 4 9 16 19 Cash & Equivalents 146 306 515 828 ST Loans & Advances 185 143 225 325 Other Current Assets 145 11 11 11 Current Assets 727 804 1,098 1,569 Trade Payables 181 287 265 306 Other Current Liabilities & Provisions 1,128 1,000 1,031 1,108 Current Liabilities 1,309 1,287 1,296 1,414 Net current Assets (582) (484) (198) 155 TOTAL APPLICATION OF FUNDS 3,439 3,869 4,277 4,797 *Consolidated Balance Sheet Page 5
CASH FLOW STATEMENT (Rs mn) FY14* FY15E FY16E FY17E Reported PAT 398 325 408 520 Non-operating & EO items 390 113 119 136 PAT from Operations 7 212 290 384 Interest, Dep & Others (348) 116 152 179 Working Capital Change 64 293 (228) (4) OPERATING CASH FLOW ( a ) (277) 622 214 559 Capex 459 (489) (300) (300) Free Cash Flow 182 133 (86) 259 Non-operating income 39 161 119 136 Investments & Others 11 (181) 176 (82) INVESTING CASH FLOW ( b ) 509 (509) (5) (246) Debt Issuance (1) - - - Interest (1) - - - Dividend - - - - FINANCING CASH FLOW ( c ) (2) - - - Fx effect 166 - - - EO items (351) 48 - - NET CASH FLOW (a+b+c) 46 160 208 313 Closing Cash 146 306 515 828 *Based on Kaya India + Kaya ME. The company declared 15m nos for Mar-14 KEY RATIOS PROFITABILITY (%) FY14* FY15E FY16E FY17E GPM 81.4 82.3 82.4 82.4 EBITDA Margin 3.6 9.9 11.3 12.1 EBIT Margin 0.3 6.4 7.4 8.3 APAT Margin 1.6 11.2 10.5 11.1 RoE 2.5 10.4 10.3 11.7 Core RoCE 1.2 11.7 13.5 16.4 RoCE 2.0 10.2 10.0 11.5 EFFICIENCY Tax Rate (%) - 0-1 Asset Turnover (x) 1.2 0.9 1.0 1.0 Inventory (days) 29 32 31 30 Debtors (days) 6 1 2 2 Payables (days) 42 26 25 24 Customer advances (days) 67 73 65 60 Cash Conversion Cycle (days) (74) (66) (57) (52) Debt/EBITDA (x) - - - - Net D/E (0.5) (0.5) (0.5) (0.5) Interest Coverage 5.9 1,032.0 - - PER SHARE DATA EPS (Rs/sh) 3.6 28.9 31.7 40.3 CEPS (Rs/sh) 11.0 37.9 43.4 54.2 BV (Rs/sh) 263.9 292.7 324.4 364.7 DPS (Rs/sh) - - - - VALUATION P/E 450.8 56.5 51.6 40.5 P/BV 6.2 5.6 5.0 4.5 EV/EBITDA 185.7 58.6 43.2 33.1 OCF/EV (%) (1.4) 3.2 1.1 3.0 FCF/EV (%) 0.9 0.7 (0.5) 1.4 FCFE/mkt cap (%) 0.9 0.6 (0.4) 1.2 *Based on Kaya India + Kaya ME. The company declared 15m nos for Mar-14 Page 6
RECOMMENDATION HISTORY Marico Kaya 2,500 2,000 1,500 1,000 500 TP Date CMP Reco Target 18-Mar-15 1,515 BUY 1,675 29-Apr-15 1,635 BUY 1,823 0 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 7
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